Fairfax Financial Holdings Ltd. Chairman and Chief Executive Officer Prem Watsa says policy shifts in the United States directly benefitted his company.AARON HARRIS/Reuters
As markets grow increasingly optimistic that the U.S. economy will get a lift from promised regulatory reforms and corporate tax cuts, Canadian insurers are calculating how those changes could boost their bottom lines.
Despite the uncertainty surrounding policy changes expected from U.S. President Donald Trump, insurance companies – several of which reported earnings this week – cautiously foresee benefits coming their way.
The most dramatic response came from insurance and investments company Fairfax Financial Holdings Ltd. this week. The Toronto-based firm took investment losses of almost $2.7-billion (U.S.) in its fourth quarter as it cut back its defensive hedging program, put in place several years ago to shield against the potential collapse of economies in the United States, Asia and Europe. After Mr. Trump's election, Fairfax moved to eliminate its remaining hedges on the Russell 2000 small-cap stock market index and pared back short positions on individual companies.
After Mr. Trump's election, Fairfax moved to eliminate its remaining hedges on the Russell 2000 small-cap stock market index and pared back short positions on individual companies. Fairfax now has about $10-billion in cash and short-term investments to buy stocks and reinvest over time.
"In our mind, the facts changed. And here are the facts: The new administration comes with economic policies that are focused on reducing corporate taxes to 15 to 20 per cent, a rollback in regulation … and very significant infrastructure spending, which is exactly what the United States needs," said Fairfax chief executive and founder Prem Watsa on a call with investors and analysts Friday. He added that if the company had predicted this sort of political change in the United States, it might not have put the hedging program in place at all.
Plans to reduce corporate taxes are also being watched closely by life insurers such as Sun Life Financial Inc. and Manulife Financial Corp.
"If there is tax reform in the U.S., or when there is tax reform in the U.S., that generally speaking should be a positive for Sun Life," said Dean Connor, the insurer's chief executive officer. "We don't know how big. We don't know what the details are. But we pay a lot of corporate income tax in the United States."
But Mr. Connor said Sun Life has also spent five years resetting and repositioning the company to grow despite the persistent low-interest-rate environment and isn't relying on market changes.
"What we've been focused on is how do we grow our sales profitably, how do we redeploy capital through acquisitions and other things and how do we grow, grow, grow," Mr. Connor said. "If interest rates stay up and go up even further, equity markets do well, tax rates come down – that's additional tailwinds for us."
Manulife chief financial officer Steve Roder said the insurer is closely watching the potential changes in the United States, where the company operates as John Hancock and makes roughly a third of its profits, and he's done the math on tax cuts.
"A one-percentage-point drop in the U.S. corporate tax rate, in theory, that is worth to us something like $15-million (Canadian) a year in earnings," he said at the Bank of America Merrill Lynch 2017 Insurance Conference in New York this week. But Mr. Roder warned against oversimplifying how beneficial such a move would be to the company; because of the "complexities of the tax calculation, it may not quite fall into earnings in that way," he said.
And even as Fairfax gears up to move "from defence to offence," a little of Mr. Watsa's former bearish tone returned when he noted that his concerns about other international markets had not been fully eliminated – and that Fairfax would also be watchful of the possibility that "the trade policies in the United States could precipitate a collapse in world trade."
Getting it right will require picking investments carefully. "The markets might not go up significantly in the next five or 10 years – who knows, right? – but there might be individual names that go up and companies that do well," Mr. Watsa said.